This is an interesting example of regulations are made when two different parts of the government disagree about how to proceed. In this case, the EPA and Department of Defense appear to have opposite views on the effects of the solvent TCE. This Los Angeles Times article below suggests that many people have been exposed to it on and near military bases.

The theory of compensating differentials predicts that if people know that they are being exposed to a risk (such as cancer) they will be compensated through either higher wages or by paying lower rents for real estate. But, if people are unaware of what they are being exposed to then these "victims" will not be compensated ex-ante for living in a nasty place.

This article suggests that DOD is blocking the EPA from carying out regulation that would mitigate this problem. Economists would argue that the optimal TCE regulation would enforce until the marginal benefits of further regulation equals the marginal cost of further TCE regulation. Calculating where these two curves cross is much easier said than done. The military has an incentive to over-state what is the marginal cost of mitigating this problem.



http://www.latimes.com/news/printedition/la-na-toxic29mar29,0,7858796.story
From the Los Angeles Times
How Environmentalists Lost the Battle Over TCE
By Ralph Vartabedian
Times Staff Writer

March 29, 2006

After massive underground plumes of an industrial solvent were discovered in the nation's water supplies, the Environmental Protection Agency mounted a major effort in the 1990s to assess how dangerous the chemical was to human health.

Following four years of study, senior EPA scientists came to an alarming conclusion: The solvent, trichloroethylene, or TCE, was as much as 40 times more likely to cause cancer than the EPA had previously believed.

The preliminary report in 2001 laid the groundwork for tough new standards to limit public exposure to TCE. Instead of triggering any action, however, the assessment set off a high-stakes battle between the EPA and Defense Department, which had more than 1,000 military properties nationwide polluted with TCE.

By 2003, after a prolonged challenge orchestrated by the Pentagon, the EPA lost control of the issue and its TCE assessment was cast aside. As a result, any conclusion about whether millions of Americans were being contaminated by TCE was delayed indefinitely.

What happened with TCE is a stark illustration of a power shift that has badly damaged the EPA's ability to carry out one of its essential missions: assessing the health risks of toxic chemicals.

The agency's authority and its scientific stature have been eroded under a withering attack on its technical staff by the military and its contractors. Indeed, the Bush administration leadership at the EPA ultimately sided with the military.

After years on the defensive, the Pentagon — with help from NASA and the Energy Department — is taking a far tougher stand in challenging calls for environmental cleanups. It is using its formidable political leverage to demand greater proof that industrial substances cause cancer before ratcheting up costly cleanups at polluted bases.

The military says it is only striving to make smart decisions based on sound science and accuses the EPA of being unduly influenced by left-leaning scientists.

But critics say the defense establishment has manufactured unwarranted scientific doubt, used its powerful role in the executive branch to cause delays and forced a reduction in the margins of protection that traditionally guard public health.

If the EPA's 2001 draft risk assessment was correct, then possibly thousands of the nation's birth defects and cancers every year are due in part to TCE exposure, according to several academic experts.

"It is a World Trade Center in slow motion," said Boston University epidemiologist David Ozonoff, a TCE expert. "You would never notice it."

Senior officials in the Defense Department say much remains unknown about TCE.

"We are all forgetting the facts on the table," said Alex A. Beehler, the Pentagon's top environmental official. "Meanwhile, we have done everything we can to curtail use of TCE."

But in the last four years, the Pentagon, with help from the Energy Department and NASA, derailed tough EPA action on such water contaminants as the rocket fuel ingredient perchlorate. In response, state regulators in California and elsewhere have moved to impose their own rules.

The stakes are even higher with TCE. Half a dozen state, federal and international agencies classify TCE as a probable carcinogen.

California EPA regulators consider TCE a known carcinogen and issued their own 1999 risk assessment that reached the same conclusion as federal EPA regulators: TCE was far more toxic than previous scientific studies indicated.

TCE is the most widespread water contaminant in the nation. Huge swaths of California, New York, Texas and Florida, among other states, lie over TCE plumes. The solvent has spread under much of the San Gabriel and San Fernando valleys, as well as the shuttered El Toro Marine Corps base in Orange County.

Developed by chemists in the late 19th century, TCE was widely used to degrease metal parts and then dumped into nearby disposal pits at industrial plants and military bases, where it seeped into aquifers.

The public is exposed to TCE in several ways, including drinking or showering in contaminated water and breathing air in homes where TCE vapors have intruded from the soil. Limiting such exposures, even at current federal regulatory levels, requires elaborate treatment facilities that cost billions of dollars annually. In addition, some cities, notably Los Angeles, have high ambient levels of TCE in the air.

An internal Air Force report issued in 2003 warned that the Pentagon alone has 1,400 sites contaminated with TCE.

Among those, at least 46 have involved large-scale contamination or significant exposure to humans at military bases, according to a list compiled by the Natural Resources New Service, an environmental group based in Washington.

The Air Force was convinced that the EPA would toughen its allowable limit of TCE in drinking water of 5 parts per billion by at least fivefold. The service was already spending $5 billion a year to clean up TCE at its bases and tougher standards would drive that up by another $1.5 billion, according to an Air Force document. Some outside experts said that estimate was probably low.

After the EPA issued the draft assessment, the Pentagon, Energy Department and NASA appealed their case directly to the White House. TCE has also contaminated 23 sites in the Energy Department's nuclear weapons complex — including Lawrence Livermore National Laboratory in the Bay Area, and NASA centers, including the Jet Propulsion Laboratory in La Cañada Flintridge.

The agencies argued that the EPA had produced junk science, its assumptions were badly flawed and that evidence exonerating TCE was ignored. They argued that the EPA could not be trusted to move ahead on its own and that top leaders in the agency did not have control of their own bureaucracy.

Bush administration appointees in the EPA — notably research director Paul Gilman — sided with the Pentagon and agreed to pull back the risk assessment. The matter was referred for a lengthy study by the National Academy of Sciences, which is due to issue a new report this summer. Any resolution of the cancer risk TCE poses will take years and any new regulation could take even longer.

The delay tactics have angered Republicans and Democrats who represent contaminated communities, where residents in some cases have elevated rates of cancer and birth defects but no direct proof that their illness is tied to TCE.

Half a dozen members of Congress last year wrote to the EPA, demanding that it issue interim standards for TCE, instead of waiting years while scientific battles are waged between competing federal agencies. EPA leaders have rejected those demands.

"The evidence on TCE is overwhelming," said Dr. Gina Solomon, an environmental medicine expert at UC San Francisco and a scientist at the Natural Resources Defense Council. "We have 80 epidemiological studies and hundreds of toxicology studies. They are fairly consistent in finding cancer risks that cover a range of tumors. It is hard to make all that human health risk go away."

But Raymond F. DuBois, former deputy undersecretary of Defense for installations and environment in the Bush administration, said the Pentagon had not been willing to accept whatever came out of the EPA, though it cared a great deal about base contamination.

"If you go down two or three levels in EPA, you have an awful lot of people that came onboard during the Clinton administration, to be perfectly blunt about it, and have a different approach than I do at Defense," DuBois said. "It doesn't mean I don't respect their opinions or judgments, but I have an obligation where our scientists question their scientists to bring it to the surface."

The military has virtually eliminated its use of TCE, purchasing only 11 gallons last year, said Beehler, an attorney who used to head environmental affairs for Koch Industries Inc., a large industrial conglomerate in Wichita, Kan.

In its fight against the 2001 risk assessment, the Pentagon has gone to the very fundamentals of cancer research: toxicology, the study of poisons; and epidemiology, the science of how diseases are distributed in the population. This scientific approach has worked better than past arguments that cleanups are a costly diversion from the Pentagon's mission to defend U.S. security.

A few months after the 2001 draft risk assessment came out, an Air Force rebuttal charged that the EPA had "misrepresented" data from animal and human health studies.

It said "there is no convincing evidence" that some groups of people, like children and diabetics, are more susceptible to TCE, a key part of the EPA's report. And it said the EPA had failed to consider viewpoints from "scientists who believe that TCE does not represent a human cancer risk at levels reasonably expected in the environment."

But comments such as these are outside the scientific mainstream. Other federal agencies have also expressed grave concern about TCE and some experts say it is only a matter of time before the chemical is universally recognized as a known carcinogen.

"Do I think TCE causes cancer? Yes," said Ozonoff, the Boston University TCE expert. "There is lots of evidence. Is there a dispute about it? Yes. Whenever the stakes are high, that's when there will be disputes about the science."

The 2001 risk assessment found TCE was two to 40 times more likely to cause cancer than was found in an assessment conducted in 1986, a wide range that reflected many scientific uncertainties. Because cancer risk assessments are not an exact science, federal regulators have historically exercised great caution in protecting public health.

The California EPA, the nation's largest and best-funded state environment agency, assessed TCE in 1999 and also found reason for concern. Its risk assessment fell in the middle of the EPA risk range, according to the study's author, Joseph Brown.

Rodents fed TCE develop liver and kidney cancer, and humans exposed to TCE show elevated rates of many types of cancer and birth defects. But industry experts fire back that evidence on TCE is still weak. Just because rats and mice get cancer from high levels of TCE doesn't prove that humans will get cancer from low levels of TCE, they say. And the epidemiological research is less convincing than animal studies, they say.

The U.S. still uses about 100 tons of TCE annually, a fraction of the consumption before the mid-1980s, when it was first classified as a probable carcinogen. It was once widely used in consumer products, such as correction fluid for typewriters and spot cleaners.

"If TCE is a human carcinogen, it isn't much of one," said Paul Dugard, a toxicologist at the Halogenated Solvents Industry Alliance Inc., which represents TCE manufacturers. "People exposed at low levels shouldn't be concerned.

"EPA's philosophy is still one of being super conservative and that is being pushed back against."

EPA officials were braced for such a controversy when the TCE assessment was issued and quickly convened a scientific advisory board to review the work. The board included public health officials at state agencies, academics and chemical industry scientists.

About one year later, the board issued its findings, praising the risk assessment and urging the EPA to implement it as quickly as possible. But the board also suggested some changes, including stronger support for its calculations of TCE's health risks and a clearer disclosure of its underlying assumptions.

The report, particularly the request for additional work, was interpreted as a serious problem by Gilman, the EPA research director.

He said the board's findings represented a "red flag" and "raised very troubling issues," all of which were key arguments by Gilman and others for stopping the assessment.

But members of the scientific advisory team dispute Gilman's interpretation, saying they felt the 2001 risk assessment was good science and their recommended changes amounted to normal commentary for such a complex matter.

"I thought by and large we supported the EPA and that its risk assessment could be modified to move forward," said Dr. Henry Anderson, the chairman of the scientific advisory board and a physician with the Wisconsin Division of Public Health. "That movement to shuttle the issue to the National Academy of Sciences was nothing like what we had in mind."

By 2004, the matter was out of the EPA's hands. The National Academy of Sciences received a $680,00 contract from the Energy Department to study TCE — a decision dictated by a working group at the White House. The briefings to the national academy on how to evaluate TCE were given by White House staff as well as the EPA.

The White House originally formed the working group — made up of officials from the Pentagon, Energy Department and NASA — in 2002 to combat the EPA's assessment of another pollutant, perchlorate. That group stayed in business to fight the TCE risk assessment. The group was co-chaired by officials in the Office of Management and Budget and the White House Office of Science and Technology Policy. The officials declined requests for interviews.

Given the controversy and stakes involved, the issue was bound to end up with National Academy of Sciences, said Peter Preuss, director of the National Center for Environmental Analysis, the EPA organization that produced the 2001 risk assessment. "It got very difficult to proceed," Preuss said.

The lead author of the 2001 health risk assessment, V. James Cogliano, agreed that the findings ran into trouble when Defense Department officials went to the White House. "Most of it was behind the scenes," said Cogliano, now a senior official at the International Agency for Research on Cancer in Lyon, France.

He added: "The degree of opposition was not surprising given the degree of economic interests involved."

The political maneuvering marked a significant change, Cogliano said. In the 1980s, Defense Department officials accepted every possible safeguard recommended by the EPA for incinerators to burn nerve gas and other chemical weapons, he recalled.

At that time, Defense Department officials said, "You put in every margin of safety, because we want to be sure it will be safe," he said. "There was no argument. There is a different spirit today."

Every health risk assessment is also getting more technically complex and more bureaucratically difficult, Preuss said.

When the EPA issued its first health risk assessment in 1976, it ran four pages and it was based in large part on studies that counted "bumps and lumps" on animals subjected to possible carcinogens. By contrast, EPA scientists now must show not only that a substance causes tumors, but the internal biological processes that are responsible. And the work is subject to greater scrutiny.

"It is true that there is more interagency review now of our work," Preuss said. "We have a couple steps where we send our assessments to the White House and they distribute them to other agencies. Each year, additional steps are taken."

All of the EPA's travails — the toughened scientific demands, the loss of authority, the interagency battles — have clearly taken a heavy toll and diminished the agency's stature.

"Inside the Beltway, it is an accepted fact that the science of EPA is not good," said Gilman, now director of the Oak Ridge Center for Advanced Studies in Tennessee, which conducts broad research on energy, the environment and other areas of science. Gilman said an entire consulting industry has sprung up in Washington to attack the EPA and sow seeds of doubt about its capabilities.

The delays in assessing TCE have also left many contaminated communities with few answers.

"My constituents who live at a recently named Superfund site … are forced to live everyday with contaminated groundwater, soil and air and can't afford to wait the years it would take for the results of your outsourced re-review," Rep. Sue W. Kelly (R-N.Y.) told EPA officials at a hearing last year.

"I have talked to a lot of sick people," said Rep. Maurice D. Hinchey (D-N.Y.), whose district includes hundreds of homes contaminated by TCE vapors, traced to an IBM Corp. factory. IBM has paid for air filtration systems for 400 homes, but has balked at more funding based on uncertainty over the health risk. "These people are deeply frustrated and increasingly angry," Hinchey said.

Meanwhile, many environmentalists are discouraged by what they view as a virtual emasculation of the EPA in this battle.

"The general public has no idea this is happening," said Erik Olson, a lawyer at the Natural Resources Defense Council. "The Defense Department has succeeded in undermining the basic scientific process at EPA. The DoD is the biggest polluter in the United States and they have made major investments to undercut the EPA."

I am in rainy Berkeley attending a OECD Roundtable on Transportation, Urban Form and Economic Growth. There are roughly 50 participants and the group includes economists, urban planners, sociologists, political scientists and others. Such a diverse "Noah's Ark" offers benefits and costs. The major benefit is that I'm learning from the non-economists and several of my friends (the economists) are here.
The cost is that the discussion across groups is strange and meandering.

There are interesting public policy issues at stake here. If Europe's cities had lower gasoline taxes or invested even more in fast clean public transit, how would this affect urban form? How would this affect "vehicle dependence"? What is the relationship between urban form and economic growth. Some economists here have argued that in cities where you can commute at faster speeds that workers are more likely to be matched with their best job because they will have a wider choice set.

This article below provides an interesting case study debating the merits of engaging in a "Big Push" for encouraging the development of disease vaccines.

Some environmentalists have talked about similar initiatives for encouraging increased "green" innovation. A policy initiative that simply subsidizes R&D may yield little extra research if the supply of researchers is inelastic. In this case, the subsidies will simply drive up the wages of the core scientists. In a globalized world labor market, if scientists can migrate across nations then subsidies are more likely to yield "research gains".

Some governments are pre-committing to purchase "green power" at a specific price. Producers who can produce such power at a lower average cost will earn profits.

I continue to focus on expectations of future prices. For business people in different sectors whether they are Walmart or a manufacturing plant what is their best guess of what will be the price of gasoline and electricity five years from now?
Dick Cheney might buy a Prius if he was convinced that the price of gasoline would be $25 a gallon!

Economics focus

Push and pull
Mar 23rd 2006
From The Economist print edition


Should the G8 promise to buy vaccines that have yet to be invented?

JESUIT missionaries in Peru stumbled across the first effective treatment for malaria: an alkaloid called quinine, extracted from the bark of the cinchona tree. Unfortunately, a vaccine for this resilient disease, or other big killers such as tuberculosis (TB) and AIDS, does not grow on trees. Inventing one, and bringing it to market, is a risky and costly undertaking. And the people in direst need of such vaccines—the poor—lack the purchasing power to make them worth a company's while.

Michael Kremer, an economist at Harvard University, argues that donors—ie, rich countries' governments—could engineer a market where none yet exists*. They should make a legally binding commitment to buy a vaccine, if and when one is invented. If credible, such a promise would create an incentive for profit-seeking companies to find, test and make life-saving jabs or pills. Whereas today public money “pushes” research on neglected diseases, under his proposal the promise of money tomorrow would “pull” research along.

This elegant notion, often called an “advance purchase commitment” (APC), has migrated with unusual speed from Mr Kremer's blackboard to the communiqués of the powerful. Next month, the finance ministers of the G8 countries will settle on one or two proposals in this spirit. As well as the toughest nuts—vaccines for AIDS, malaria and TB—three softer targets are also vying for the G8's attention: rotavirus (which causes diarrhoea in children), human papillomavirus (a cause of cervical cancer), and pneumococcus (a bacterium that causes pneumonia).

But even as it wins converts, the APC idea is also collecting critics. None is more dogged than Andrew Farlow, an economist at Oxford University and author of a sprawling critique† of Mr Kremer's big idea and its application to malaria in particular. APCs, he says, are a “policy boil” that needs to be lanced.

There is, Mr Farlow points out, no such thing as “a” malaria vaccine. The first vaccine to market may not be the best possible. The earliest polio shot, for example, was superseded by an oral vaccine, which was easier to administer and lasted longer. From the outset, the G8 will have to set out the traits of a vaccine it would be willing to buy: how effective it must be; how long it should last; the maximum number of doses it should require. Its thorny task is to decide what would be desirable, at what price, long before anyone knows what is feasible.

However the terms are set, Mr Farlow argues, the G8 pledge will at best motivate firms to hit this mark, but not surpass it. Firms are, after all, competing for a limited pot of money. (Mr Kremer and his collaborators suggest it should be about $3 billion for a malaria, AIDS or TB vaccine, which is about the value of the market for a new drug in the rich world.) A company that comes to market second, with a later, better vaccine may find the pot already emptied by its swifter rival. If companies anticipate this danger, they will lower their sights, settling for a vaccine that just clears the bar set by the G8 donors.

To this objection, the advocates of pull-funding have at least two responses. First, in the face of a disease such as malaria, which kills up to 2.7m people a year, speed is itself a virtue, for which some sacrifice in quality may be worthwhile. Second, in its current incarnation, the APC creates some room for later vaccines to enter the market. Money will not be showered on a company the moment it crosses the finish line, but will be paid out a little at a time. In one scenario, the final customers for vaccines would set the pace. For example, the Kenyan health ministry would decide whether to buy a company's vaccine, for $1 per dose, and the company would then receive a “top-up” payment of $14 from the G8. If the pot (including the Kenyan co-payments) contained $3 billion, it would be drained only after 200m shots had been sold. This, advocates hope, will give a second-generation vaccine time to steal the market from its forerunners.

Unfortunately, this set-up creates problems of its own. Corruption is one danger. If every dollar that a health ministry spends on a given vaccine is worth another $14 to the company supplying it, an unscrupulous firm might go to illegal lengths to attract the ministry's custom.

A cure or a placebo?

What if companies fail to bite at the carrot the G8 dangles before them, or fall short of a vaccine donors are willing to buy? Well then, argues Mr Kremer, donors have lost nothing. If his scheme fails, the public purse has lost hardly a cent. If it succeeds, then every dollar spent is eminently worthwhile. This, needless to say, is a big part of his scheme's appeal to politicians.

But Mr Farlow doubts that a G8 promise would be credible unless funds were set aside in advance—money he would rather were used elsewhere. There is much else to spend it on. By one count, more than 25 malaria vaccines are currently in or near clinical trials, pushed by public money and philanthropic generosity. Several vaccines, for example against hepatitis B, have already been invented, but fail to reach all the poor.

APCs should not stop governments providing a push wherever it is needed, Mr Kremer insists. But will governments themselves hear him? Critics argue that even if his scheme makes no claim on public funds today, it has still made a big demand on political attention, diverting it from other ends. Mr Kremer sincerely hopes APCs will help provide the world's poor with much-needed vaccines. It might; but despite his best intentions it might instead provide politicians with a prophylactic against other pressing demands for their help.

Do demand curves slope down? China's government will soon offer us another test of econ 101 by increases its taxes on energy and resource consumption. Wooden chopsticks will face a 5% higher tax! What will people substitute to?

Free market environmentalits should be excited about this opportunity to study how consumers and producers respond to these higher taxes. Do these economic actors economize on "natural capital" as its price goes up? Peak Oilers should pay close attention to the short term and medium term effects of this tax.

Will a higher Chinese tax encourage U.S exporting firms (who hope to sell to Chinese consumers) to innovate so that their products economize on resource consumption? If this is the case and there is learning by doing within U.S firms, then the Chinese tax could help green our economy! Perhaps globalization does offer some environmental benefits?


March 23, 2006
China Raises Taxes to Curb Use of Energy and Timber
By KEITH BRADSHER

HONG KONG, Thursday, March 23 — The Chinese government announced plans on Wednesday to increase existing taxes and impose new ones on April 1 for everything from gas-guzzling vehicles to chopsticks in a move to rein in rising use of energy and timber and the widening gap between rich and poor.

New or higher taxes will fall on vehicles with engines larger than two liters, disposable wooden chopsticks, planks for wood floors, luxury watches, golf clubs, golf balls and certain oil products.

China's finance ministry disclosed the higher taxes Tuesday night in a statement that was reported Wednesday morning by the official New China News Agency. The statement offered another sign that some senior Chinese officials may be having second thoughts about the rapid growth of privately owned family vehicles, whose sales rose to 3.1 million last year from just 640,000 in 2000.

"In recent years, car ownership in China has grown rapidly and fuel consumption has risen considerably, and this highlights the conflict between supply and demand of oil resources," the statement said. "At the same time, pollution caused by motor cars has become the main source of pollution in big and medium-size cities."

The finance ministry is imposing a 5 percent tax on chopsticks and floor planks, citing a need to conserve timber. Environmentalists around the world have been warning that China's voracious demand for wood was contributing to the clear-cutting of many forests, especially in Southeast Asia.

The production of disposable wooden chopsticks consumes two million cubic meters (70.6 million cubic feet) of timber each year, the ministry said. Plastic chopsticks, which can be washed and reused, will not be subject to the new tax.

A new tax of 10 percent on yachts, golf clubs and golf balls, and a 20 percent tax on luxury watches, is squarely aimed at China's emerging elite of wealthy industrialists and well-connected Communist officials.

China's yacht market is still in its infancy, as military restrictions on ocean traffic and commercial restrictions on river traffic have limited yachts to lakes — although a few entrepreneurs have been able to get around the rules to cruise on the Yangtze River near Shanghai.

Chinese officials have periodically assailed golf, especially when villages and farms are demolished with little compensation to make way for new golf courses.

The biggest commercial effect of the new taxes is likely to fall on sport utility vehicles and luxury sedans. China is reducing its tax on vehicles with engines of 1 to 1.5 liters to 3 percent from 5 percent, while leaving the rate unchanged for slightly more powerful engines. The tax rate will rise to 20 percent, from 8 percent now, for vehicles with engines larger than four liters.

The taxes are likely to affect foreign automakers, especially American manufacturers, more than Chinese companies, which tend to make models with smaller engines.

The big question for automakers is how much of the tax to pass on to consumers, since the tax is collected from the manufacturers. With a week and a half remaining until the new tax takes effect, marketing executives scrambled on Wednesday to assess the impact and no automaker immediately raised prices.

"We are doing the calculations and assessing the impact, and on the other hand watching the actions of our competitors," said Kenneth Hsu, a spokesman for the China operations of Ford Motor, which sell everything from compact cars with 1.6-liter engines to Lincoln Navigator full-size S.U.V.'s with 5.4-liter engines.

Trevor Hale, a DaimlerChrysler spokesman, said the company offered fuel-efficient engines; many Mercedes sedans sold in China have considerably smaller engines than models sold in the United States.

Chinese officials considered and rejected a tax system based on gas mileage instead of engine displacement. That approach would have benefited foreign automakers who possess better technology that permits them to squeeze more power out of the same size engine than purely Chinese manufacturers can.

General Motors China welcomed the new taxes on Thursday but voiced a reservation: "While we believe the new measure will be more environmentally friendly and help lower energy consumption in China, we think it would be more reasonable to base the tax rate on the actual fuel consumption of a vehicle instead of the size of its engine displacement, which is a widely accepted practice worldwide."

Yale Zhang, an analyst in the Shanghai office of CSM Worldwide, a big automotive consulting firm based in the Detroit suburbs, said that Chinese automakers had growing influence in policy debates and that the new rules might lead to a proliferation of vehicles with engines a hundredth of a liter below the thresholds for higher taxes.

Chinese regulators have already imposed stringent fuel-economy regulations that take effect for all vehicles sold after July 1, and have said that they are considering a separate gas-guzzler tax for models that do not comply. The finance ministry's statement on the tax increases on April 1 made no mention of such a gas-guzzler tax, however, and finance ministry officials could not be reached for elaboration.

The finance ministry also announced a modest new tax of a penny (0.1 yuan) a liter for aviation fuel and 2 cents (0.2 yuan) a liter for naptha, solvents and lubricants, but said it would not collect the new aviation fuel tax for now and would collect only 30 percent of the new tax on naptha, solvents and lubricants.

Applying taxes on oil products but not collecting them while prices are high could set a precedent for how China handles taxes on gasoline and diesel. Chinese officials have said repeatedly that they would like to raise fuel taxes to encourage conservation, but do not want to act while world oil prices are close to record levels.

On April 1, China will also lower its tax on motorcycles with engines under 250 cubic centimeters to 3 percent from 10 percent, while leaving the tax unchanged at 10 percent for motorcycles with larger engines.

Western manufacturers like Harley-Davidson are trying to break into the Chinese market with powerful bikes, while Chinese manufacturers like Lifan mainly produce less powerful models.

Good students always like report card day. This organization (http://www.ceres.org/pub/publication.php?pid=84) has determined which corporations are "naughty" and "nice" with regards to addressing climate change issues.

Among the industry sector leaders and laggards:

Sector Leaders Laggards

Oil/Gas BP (90 points*) ExxonMobil (35)
Chemical DuPont (85**) PPG (21)
Metals/Mining Alcan (77) & Alcoa (74) Newmont (24)
Electric Power AEP & Cinergy (both 73) Sempra Energy (24)
Auto Toyota (65) Nissan (33)

What do these rankings mean? How were they generated? I have no idea! But, we love rankings. Perhaps Zagats will put out a new ranking based on which restaurants create the least greenhouse gases?

To be serious for a second, in the absence of the greenhouse gas pollution permits what incentives do for profit companies for conserving on their emissions? If they anticipate that in the future President Hilary Clinton will push for such carbon taxes then they will have an incentive. Are these "nice" companies trying to buy good public relations with greens? How have they explained to their shareholders how it makes good business sense today to be green?

Perhaps they will argue that they bet that fossil fuels will be more expensive in the future and thus it is wise to substitute away today. This logic makes sense to me.

How will consumers react to this report? Will they boycott the "brown" companies?
Here is what the New York Times has to say.


March 22, 2006
Study Says U.S. Companies Lag on Global Warming
By CLAUDIA H. DEUTSCH

European and Asian companies are paying more attention to global warming than their American counterparts. And chemical companies are more focused on the issue than oil companies.

Those are two conclusions from "Corporate Governance and Climate Change: Making the Connection," a report that Ceres, a coalition of investors and environmentalists, expects will influence investment decisions.

The report, released yesterday, scored 100 global corporations — 74 of them based in the United States — on their strategies for curbing greenhouse gases. It covered 10 industries — oil and gas, chemicals, metals, electric power, automotive, forest products, coal, food, industrial equipment and airlines — whose activities were most likely to emit greenhouse gases. It evaluated companies on their board oversight, management performance, public disclosure, greenhouse gas emissions, accounting and strategic planning.

The report gave the chemical industry the highest overall marks, with a score of 51.9 out of a possible 100; DuPont, with 85 points, was the highest-ranking American company in any of the industries. Airlines, in contrast, ranked lowest, with a score of 16.6; UAL, the parent of United Airlines, received just 3 points.

The study gave General Electric, American Electric Power and Cinergy among the highest scores in their industries. But over all, it concluded, American companies "are playing catch-up" with international competitors like BP, Toyota, Alcan, Unilever and Rio Tinto.

"Dozens of U.S. businesses are ignoring the issue with 'business as usual' responses that are putting their companies, and their shareholders, at risk," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk, a group whose members control a total of $3 trillion in investment capital. "When Cinergy and American Electric Power are tackling this issue, and Sempra and Dominion Resources are not, that should be a red flag to investors."

Art Larson, a Sempra Energy spokesman, took exception to Sempra's score of 24. He said that Sempra, based in San Diego, had been "aggressive in promoting energy efficiency and procuring renewable energy sources," and that "in the area of environmental responsibility, Ceres seems to give more weight to words over action." Hunter Applewhite, a spokesman for Dominion, a big electric utility in Richmond, Va., that scored 27, said the company had no comment on its ranking.

Members of the Investor Network said they would take the report's conclusions seriously. "We need to continue to press poor-performing companies to clean up their act," said California's state treasurer, Phil Angelides, who is on the board of two pension funds that collectively manage more than $300 billion in assets.

Connecticut's state treasurer, Denise L. Nappier, who administers a $22 billion investment fund, lauded the report as an "unprecedented window into how companies most affected by climate risk are responding at the board level, through C.E.O. leadership and strategic planning."

The report does show progress since 2003, when a much smaller Ceres study concluded that most American companies were ignoring the threat of climate change. Since then, Ceres notes, Chevron Texaco has invested $100 million in developing cleaner fuels, Ford Motor introduced the first American hybrid car, American Electric Power has committed itself to "clean coal" technologies and G.E. has introduced its Ecomagination program stressing "green" products. And many companies including Dow Chemical, Anadarko Petroleum and Cinergy have board committees that oversee the curbing of greenhouse gases.

"More U.S. companies realize that climate change is an enormous business issue that they need to manage immediately," Ms. Lubber said.

Still, the top-scoring company, with 90 points, was BP, a British company that has said it will invest $8 billion in solar, wind and other clean-energy technologies in the next decade. "BP understands that all companies must work to reduce their carbon footprint, starting with fossil fuels," Ms. Lubber said.

When I was in graduate school, I was taught that economics is the study of incentives and their intended and unintended consequences. Today, economics is morphing into the empirical field where we challenge the "conventional wisdom".

This paper http://www.nber.org/papers/w12102 offers some novel freakonomics.

A Healthy Economy Can Break Your Heart

Christopher J. Ruhm

NBER Working Paper No. 12102
Issued in March 2006
NBER Program(s): HC

---- Abstract -----

Panel data econometric methods are used to investigate how the risk of death from acute myocardial infarction (AMI) varies with macroeconomic conditions after controlling for demographic factors, fixed state characteristics, general time effects and state-specific time trends. The sample includes residents of the 20 largest states over the 1979 to 1998 period. A one percentage point reduction in unemployment is predicted to raise AMI mortality by 1.3 percent, with a larger increase in relative risk for 20-44 year olds than older adults, particularly if the economic upturn is sustained. Nevertheless, the much higher absolute AMI fatality rate of senior citizens implies that they account for most of the additional deaths. This suggests the importance of factors like air pollution and traffic congestion that increase with economic activity, are linked to coronary heart disease and may have particularly strong effects on vulnerable segments of the population, such as the frail elderly. AMI mortality risk quickly rises when the economy strengthens and increases further if the favorable economic conditions persist. This is consistent with strong effects of other short-term factors on heart attack risk and with health being a durable capital stock that is affected by flows of lifestyle behaviors and environmental conditions whose effects accumulate over time.


What could be the causal mechanism here? One plausible environmental story relates to electric utilities. During boom times, high emitting low productivity electric utilities may be used to ramp up the supply of power. Such scale effects could increase ambient air pollution. The author clearly has a nice empirical fact but not a great story for what is the true data generating process.

I have not read this paper but it would interest me if he has a placebo control group such as another disease death rate for a disease that does not have an environmental component. If he could show that business cycles have no effect on this "control group"'s death rate then I would be more convinced about his "environmental" hypothesis that pollution and congestion during booms are killing people.

Suppose that you are Paul Krugman. You are a benevolent planner who wants to maximize the well being of all 300 million people in the United States. Where should these people live and at what population density? Would you build 100 3 million person cities with the density of Houston or of New York City's Downtown? Would you build 10 Mega Cities or would you distribute the population uniformly across space?

Economists are always interested in how close does the outcome we see in our market economy approximate the "ideal outcome" that the benevolent all knowing planner could achieve.

To solve the planner's problem you would have to grapple with the question of the costs and benefits of cities and how these private benefits and social costs change as a function of city size. Ed Glaeser's 1998 Journal of Economic Perspectives piece ("Are Cities Dying?") offers a clear overview of the economic forces encouraging and discouraging the formation of big cities. Vern Henderson also posts several useful urban papers here:
http://www.econ.brown.edu/faculty/henderson/papers.html

If you would like to see my new paper: "Quality of Life in Sprawled and Compact Cities" a .pdf is available here:
http://fletcher.tufts.edu/faculty/kahn/publications.asp

Most cold cities have not performed great over the last 30 years. What is it about New York City, Boston and Chicago relative to other cities such as Cleveland, Detroit and Philadelphia. How do we explain why the former set have boomed relative to the second set?

My future colleague Dan Drezner provides some exciting analysis here.
http://www.danieldrezner.com/archives/002638.html

I was born in Chicago. I lived in NYC from 1973-1984. I lived in chicago from 1988 to 1993 and I've lived in Boston from 1996 to 1998 and from 2000 until now so I think I have some street credibility on this subject.

1. Michael Jordan changed the course of Chicago transforming it into a "cool" city.

2. Boston, NYC and Chicago all have serious Universities nestled in them this provides a constant source of intellectuals and serious young people flowing into these cities

3. NYC and Chicago are immigrant hotbeds and this fosters the Jane Jacobs diversity element.

4. Boston, NYC and Chicago are all cold but they strike me as "green cities" where there are many communities with high quality of life.


Ed Glaeser has posted to his harvard webpage historical essays on the long run dynamics of Boston and New York City. You should read these papers if you want details on the long run cycles for these cities.

If education is the key to local economic growth, then Boston, Chicago and NYC's success has been based on attracting and retaining the high skilled to live their lives in these cold cities. Quality of life and economic opportunity play a key role here in achieving these goals.

Can public health epidemics such as SARS stop commerce in a major city? This article in the Times argues that globalized companies face the risk of losing access to their workforce in other countries if a disease spreads but that these companies have not planned for this contingency.

A free market view of public health investments by nation would argue that if globalized firms can credibly threaten to invest less FDI in nations where public health outbreaks are likely then this provides incentives for the government of these nations to invest more in public health to reduce the probability of disease outbreaks.

My point is similar to the public finance literature on when local governments are disciplined to not raise taxes or provide low quality public services. If firms can "vote with their feet" and locate elsewhere then capitalist mobility can be a driver of improved governance in LDC nations.



March 16, 2006
Is Business Ready for a Flu Pandemic?
By ELISABETH ROSENTHAL and
KEITH BRADSHER

Governments worldwide have spent billions planning for a potential influenza pandemic: buying medicines, running disaster drills, developing strategies for tighter border controls. But one piece of the plan may be missing: the ability of big corporations to continue to provide vital services.

Airlines, for instance, would have to fly health experts around the world and overnight couriers would have to rush medical supplies to the front lines. Banks would need to ensure that computer systems continued to move money internationally and that local customers could get cash. News outlets would have to keep broadcasting so people could get information that might mean the difference between life and death.

"I tell companies to use their imagination to think of all the unintended consequences," said Mark Layton, global leader for enterprise risk services at Deloitte & Touche in New York. "Will suppliers be able to deliver goods? How about services they've outsourced — are they still reliable?"

Experts say that many essential functions would have to continue despite the likelihood of a depleted work force and more limited transportation. Up to 40 percent of employees could be sick at one time.

Indeed, the return of the bird migration season has touched off new worries over how a serious outbreak could interrupt business in many parts of the world simultaneously, perhaps for months on end.

The World Health Organization has confirmed 173 cases of the avian flu virus in humans, most of whom had close contact with diseased birds. Of those, 93 people died, almost all of them in Asia. Vietnam has been particularly hard hit. In January, though, the first human cases were confirmed in Turkey — far from the origin of the virus in central China.

And in recent weeks, officials in several European and African countries have confirmed the virus in wild or domestic flocks of birds. While avian influenza does not now readily infect humans or spread among them, scientists are worried that the virus could soon acquire that ability through normal biological mixing, setting off a disastrous human pandemic.

Yet despite this threat, many companies have only rudimentary contingency plans in place. In a survey of more than 100 executives in the United States by Deloitte & Touche, released this January, two-thirds said their companies had not yet prepared adequately for avian flu, and most had no one specifically in charge of such a plan.

"Business is not prepared for even a moderate avian flu epidemic," the report concluded.

In contrast, corporations in Southeast Asia have made more headway, in part because the avian influenza virus has been circulating in birds in Asia for years. Also, Asian companies learned in the 2003 outbreak of Sudden Acute Respiratory Syndrome, or SARS, that even a small infectious outbreak could have devastating economic consequences, bringing commerce in Hong Kong, Singapore and Beijing to a near standstill.

A recent survey of 80 corporate officials at an avian flu seminar held by the American Chamber of Commerce in Hong Kong found that nearly every company had someone in charge of avian flu policy, and 60 percent had clearly stated plans that could be put in place immediately. These included provisions for employees to work at home to prevent the spread of disease in the office, and for relaying warnings to workers by text messages to mobile phones.

The lack of corporate preparedness elsewhere has "enormous implications," the Deloitte report said.

"A pandemic flu outbreak in any part of the world would potentially cripple supply chains, dramatically reduce available labor pools," the report said. "In a world where the global supply chain and real-time inventories determine most everything we do, down to the food available for purchase in our grocery stores, one begins to understand the importance of advanced planning."

Among the prepared, HSBC, a global bank that started as the Hongkong and Shanghai Bank and remains the dominant bank in Hong Kong, has an especially detailed plan for avian flu, drawing on its experience with SARS. The company has been making preparations for employees to work from home, but is also preparing to divide work among multiple sites, an approach that appeared in only 37 percent of the plans in the American Chamber survey.

The hope is that if the flu races through the staff at one site, another site may be spared. During SARS, the bank activated an emergency center at the opposite end of Hong Kong's harbor and sent 50 bond traders there with instructions that they were not to see anyone from the head office even at social occasions.

In the survey of companies conducted by the American Chamber of Commerce in Hong Kong, provisions of corporate contingency plans ranged from allowing some employees to work from home — the most popular strategy, included in 72 percent of avian flu contingency plans — to the outright closing of offices, included in 32.5 percent of plans.

Other methods to prevent spread include canceling face-to-face meetings in favor of teleconferencing, and installing germ-killing hand washes in offices. Many companies also proposed more stringent health monitoring of employees, families and company visitors. In Singapore, throughout the SARS outbreak, many businesses required temperature checks before entering buildings, as a way to screen out those who might be ill.

Some of the most important planning involves not employee health, but how to continue to deliver vital services in a crisis. Time Warner's Cable News Network is making preparations to stay on the air from different locations.

"If there should be something that quarantines the production center here in Hong Kong, we could hand off to London and Atlanta," Stephen Marcopoto, president of Turner International Asia Pacific, a Time Warner unit in Hong Kong, said.

Time Warner is also working to create a mechanized cart that could automatically load tape after tape into a satellite transmission system, so it could keep stations like Cartoon Network on the air — a boon if children were homebound for months.

But many corporate plans are painted in fairly broad brush strokes, part of general disaster planning. And many companies refuse to discuss details.

"As other global players, we have a global business continuity program in place that covers a wide range of contingencies, including flu pandemic," said Klaus Thoma, a spokesman for Deutsche Bank in Frankfurt, who said that details were privileged company information.

Likewise, FedEx, the express delivery service, has been "monitoring the situation for some time," said Sandra Munoz, a spokeswoman for the company in New York, noting that FedEx had "the flexibility within our system to make the necessary adjustments to minimize any impact to our customers, regardless of the situation." Without going into details, FedEx said that it had developed contingency plans "down to every district or market here in Asia Pacific," said John Allison, a company representative in Hong Kong.

But Mr. Layton says he is worried that many companies are not thinking about the unique problems that pandemic flu raises. "They are adapting existing risk-management strategies, which are fine, but they really have to go beyond that," he said.

But even in hot spots in Asia, not all companies are readying themselves for an outbreak. In the Guangdong Province in south China, which was the epicenter of SARS and where avian flu is already widespread, a recent survey by the American Chamber of Commerce found that 54 percent of members had made no preparations.

"We're trying to push them to develop plans," said Harley Seyedin, the Guangdong chamber's president.

I've been blogging for 1/2 a year now. At the start, I had plenty to say but now somehow I have less to say. I did want to mention a promising branch of research in economics focusing on the consequences of media coverage.

It is clear to me that the media play a key role in focusing social interactions if the media is covering a story then everyone starts to talk about it. The Larry Summers at Harvard Excitement is one prime example. The Harvard Crimson (the student newspaper) generated a ton of attention for itself as it became part of the story as its coverage fanned the fires as partisans from both sides used it to communicate their views on the issue.

The role of the media in day to day life raises a fundamental question of causality. When we see Fox News viewers vote Republican, is this selection or treatment? In English, do Republicans choose to watch shows that reinforce their worldviews or does watching Fox turn a Jane Fonda or Ted kennedy into a dick Chaney?

One recent Berkeley study claims that it is treatment as they investigate how voting patterns change in communities that are "treated" with new access to the Fox network.

My own interest in media issues focuses on the media's role in shaping what environmental issues that people are thinking about. If the media played closer attention to climate change in the United States, would the typical voter be demanding greater action by the Congress to reduce our greenhouse gas emissions?

In the graph below I report New York Times Coverage of "Oil Spills" and "Nuclear Disasters" before and after the Exxon Valdez shocks and the Chernobyl shocks; note how well known shocks affect the time series of media coverage and then notice the decay. It looks to me like there is a "window of opportunity" for activists to make progress after such shocks but then people move on and return to "business as usual".